Is Diageo About To Enter The Cannabis Space?

Diageo owned whiskies on the whisky wall at their headquarters in Edinburgh. (Photo by Andrew Milligan/PA Images via Getty Images)

Shares of marijuana stocks spiked amid rumors regarding Diageo‘s (NYSE:DEO) interest in entering the cannabis space. This latest development does not come as much of a surprise and follows close on the heels of a massive $4 billion (~CAD 5 billion) investment by alcoholic beverage giant Constellation Brands (NYSE: STZ) into pot company Canopy Growth Corp. Other beer makers are also entering the space, such as Molson Coors Brewing Co and Heineken, in order to produce marijuana-infused beverages. During the company’s FY 2018 (year ended June 2018) earnings call, while Diageo’s management did state that they are closely tracking the space, no development was reported. However, according to Bloomberg, the liquor giant is in talks with at least three major marijuana producers.

We have a price estimate of $157 for Diageo, which is higher than the current market price. The charts have been made using our new, interactive platform. You can click here for our interactive dashboard on Our Outlook For Diageo In FY 2019 to modify the various drivers, to analyze their impact on Diageo’s revenues, earnings, and price estimate.

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Appeal Of The Cannabis Market

The market for beer has been declining in the U.S., and liquor companies could be looking to offset this drag on their revenues by introducing cannabis-infused drinks. There appears to be a correlation between the decline in liquor sales and marijuana use in some cases. According to a joint study conducted by three universities, it was found that counties located in U.S. states where medical marijuana has been legalized registered a 15% drop in monthly alcohol sales. While Constellation Brands has stated that marijuana-based beverages won’t be introduced in the U.S. until the federal law is changed, it is possible that legislative changes could be imminent, potentially expanding the market for cannabis. This could strengthen the case for liquor companies hedging their bets in the marijuana space.

Beer maker Molson Coors has tied up with Hydropothecary to develop marijuana-infused drinks in Canada, while Heineken has already launched a THC-infused sparkling water in California dispensaries. Consequently, we can say that Diageo isn’t the only alcoholic-beverage company interested in this space. Time will tell if mixing liquor and marijuana is a profitable idea for these companies.

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